Dividend policy. Introduction: Stock Dividend: When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

Question

Company SmallCap is in the food processing business and has a market capitalization of $100 million and a market beta of 1.5. SmallCap considers a merger with LowCost, another company mainly producing computer software that has a market capitalization of $400 million and a market beta of 1.2. The CEO of SmallCap argues that this will reduce their cost of capital. Do you agree with the comment? Group of answer choices a. More information needed b. Depending on the project c. Yes d. No

Answer 1

Question

Chapter 14, Problem 11IC

a.1.

Summary Introduction

To explain: Dividend policy.

Introduction:

Stock Dividend:

When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

2.

Summary Introduction

To explain: Dividend irrelevance theory and assumptions underlying the theory.

3.

Summary Introduction

To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends

b.(1)

Summary Introduction

To discuss: The information content or signaling, hypothesis.

(2)

Summary Introduction

To discuss: Clientele effect.

(3)

Summary Introduction

To explain: Catering theory.

(4)

Summary Introduction

To explain: The effect of catering theory on dividend policy.

c.1.

Summary Introduction

To calculate: Amount to be raised through equity.

2.

Summary Introduction

To calculate: Payout ratio and the effect on it under the residual dividend model.

3.

Summary Introduction

To explain: advantages and disadvantages of residual policy.

d.

Summary Introduction

To determine: The series of steps that many company’s take in setting dividend policy in practice.

e.

Summary Introduction

To explain: dividend reinvestment plan and its working.

f.

Summary Introduction

To explain: Stock dividends, stock splits and their advantages as well as disadvantages.

g.

Summary Introduction

To explain: Stock repurchase and its advantages and disadvantages.

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Company SmallCap is in the food processing business and has a market capitalization of $100 million and a market beta of 1.5. SmallCap considers a merger with LowCost, another company mainly producing computer software that has a market capitalization of $400 million and a market beta of 1.2. The CEO of SmallCap argues that this will reduce their cost of capital. Do you agree with the comment? Group of answer choices a. More information needed b. Depending on the project c. Yes d. No

1. Edmund Enterprises recently made a large investment to upgrade its technology. Although these improvements won’t have much effect on performance in the short run, they are expected to reduce future costs significantly. What effect will this investment have on Edmund Enterprises’ earnings per share this year? What effect might this investment have on the company’s intrinsic value and stock price? 2. Suppose you are a director of an energy company that has three divisions—natural gas, oil, and retail (gas stations). These divisions operate independently from one another, but all division managers report to the firm’s CEO. If you were on the compensation committee, as discussed in Question 1-12, and your committee was asked to set the compensation for the three division managers, would you use the same criteria as that used for the firm’s CEO? Explain your reasoning

The Manx Company was recently formed to manufacture a new product. It has the following capital structure in market value terms: Debentures $ 6,000,000 Preferred stock $2,000,000 Common stock(320,000 shares) $8,000,000 Total $16,000,000 The company has a marginal tax rate of 40 percent. A study of publicly held companies in this line of business suggests that the required return on equity is about 17 percent. (The CAPM approach was used to determine the required rate of return.) The Manx Company’s debt is currently yielding 13 percent, and its preferred stock is yielding 12 percent. Compute the ﬁrm’s present weighted average cost of capital.

Answer 2

Question

Chapter 14, Problem 11IC

a.1.

Summary Introduction

To explain: Dividend policy.

Introduction:

Stock Dividend:

When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

2.

Summary Introduction

To explain: Dividend irrelevance theory and assumptions underlying the theory.

3.

Summary Introduction

To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends

b.(1)

Summary Introduction

To discuss: The information content or signaling, hypothesis.

(2)

Summary Introduction

To discuss: Clientele effect.

(3)

Summary Introduction

To explain: Catering theory.

(4)

Summary Introduction

To explain: The effect of catering theory on dividend policy.

c.1.

Summary Introduction

To calculate: Amount to be raised through equity.

2.

Summary Introduction

To calculate: Payout ratio and the effect on it under the residual dividend model.

3.

Summary Introduction

To explain: advantages and disadvantages of residual policy.

d.

Summary Introduction

To determine: The series of steps that many company’s take in setting dividend policy in practice.

e.

Summary Introduction

To explain: dividend reinvestment plan and its working.

f.

Summary Introduction

To explain: Stock dividends, stock splits and their advantages as well as disadvantages.

g.

Summary Introduction

To explain: Stock repurchase and its advantages and disadvantages.

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Answer 3

Question

Chapter 14, Problem 11IC

a.1.

Summary Introduction

To explain: Dividend policy.

Introduction:

Stock Dividend:

When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

2.

Summary Introduction

To explain: Dividend irrelevance theory and assumptions underlying the theory.

3.

Summary Introduction

To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends

b.(1)

Summary Introduction

To discuss: The information content or signaling, hypothesis.

(2)

Summary Introduction

To discuss: Clientele effect.

(3)

Summary Introduction

To explain: Catering theory.

(4)

Summary Introduction

To explain: The effect of catering theory on dividend policy.

c.1.

Summary Introduction

To calculate: Amount to be raised through equity.

2.

Summary Introduction

To calculate: Payout ratio and the effect on it under the residual dividend model.

3.

Summary Introduction

To explain: advantages and disadvantages of residual policy.

d.

Summary Introduction

To determine: The series of steps that many company’s take in setting dividend policy in practice.

e.

Summary Introduction

To explain: dividend reinvestment plan and its working.

f.

Summary Introduction

To explain: Stock dividends, stock splits and their advantages as well as disadvantages.

g.

Summary Introduction

To explain: Stock repurchase and its advantages and disadvantages.

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Answer 4

Question

Chapter 14, Problem 11IC

a.1.

Summary Introduction

To explain: Dividend policy.

Introduction:

Stock Dividend:

When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

2.

Summary Introduction

To explain: Dividend irrelevance theory and assumptions underlying the theory.

3.

Summary Introduction

To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends

b.(1)

Summary Introduction

To discuss: The information content or signaling, hypothesis.

(2)

Summary Introduction

To discuss: Clientele effect.

(3)

Summary Introduction

To explain: Catering theory.

(4)

Summary Introduction

To explain: The effect of catering theory on dividend policy.

c.1.

Summary Introduction

To calculate: Amount to be raised through equity.

2.

Summary Introduction

To calculate: Payout ratio and the effect on it under the residual dividend model.

3.

Summary Introduction

To explain: advantages and disadvantages of residual policy.

d.

Summary Introduction

To determine: The series of steps that many company’s take in setting dividend policy in practice.

e.

Summary Introduction

To explain: dividend reinvestment plan and its working.

f.

Summary Introduction

To explain: Stock dividends, stock splits and their advantages as well as disadvantages.

g.

Summary Introduction

To explain: Stock repurchase and its advantages and disadvantages.

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Answer 5

Chapter 14, Problem 11IC

a.1.

Summary Introduction

To explain: Dividend policy.

Introduction:

Stock Dividend:

When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

2.

Summary Introduction

To explain: Dividend irrelevance theory and assumptions underlying the theory.

3.

Summary Introduction

To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends

b.(1)

Summary Introduction

To discuss: The information content or signaling, hypothesis.

(2)

Summary Introduction

To discuss: Clientele effect.

(3)

Summary Introduction

To explain: Catering theory.

(4)

Summary Introduction

To explain: The effect of catering theory on dividend policy.

c.1.

Summary Introduction

To calculate: Amount to be raised through equity.

2.

Summary Introduction

To calculate: Payout ratio and the effect on it under the residual dividend model.

3.

Summary Introduction

To explain: advantages and disadvantages of residual policy.

d.

Summary Introduction

To determine: The series of steps that many company’s take in setting dividend policy in practice.

e.

Summary Introduction

To explain: dividend reinvestment plan and its working.

f.

Summary Introduction

To explain: Stock dividends, stock splits and their advantages as well as disadvantages.

g.

Summary Introduction

To explain: Stock repurchase and its advantages and disadvantages.

Answer 6

Chapter 14, Problem 11IC

a.1.

Summary Introduction

To explain: Dividend policy.

Introduction:

Stock Dividend:

When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

Answer 7

Chapter 14, Problem 11IC

a.1.

Summary Introduction

To explain: Dividend policy.

Introduction:

Stock Dividend:

When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

Answer 8

2.

Summary Introduction

To explain: Dividend irrelevance theory and assumptions underlying the theory.

Answer 9

2.

Summary Introduction

To explain: Dividend irrelevance theory and assumptions underlying the theory.

Answer 10

3.

Summary Introduction

To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends

Answer 11

3.

Summary Introduction

To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends

Answer 12

b.(1)

Summary Introduction

To discuss: The information content or signaling, hypothesis.

Answer 13

b.(1)

Summary Introduction

To discuss: The information content or signaling, hypothesis.

Answer 14

(2)

Summary Introduction

To discuss: Clientele effect.

Answer 15

(2)

Summary Introduction

To discuss: Clientele effect.

Answer 16

(3)

Summary Introduction

To explain: Catering theory.

Answer 17

(3)

Summary Introduction

To explain: Catering theory.

Answer 18

(4)

Summary Introduction

To explain: The effect of catering theory on dividend policy.

Answer 19

(4)

Summary Introduction

To explain: The effect of catering theory on dividend policy.

Answer 20

c.1.

Summary Introduction

To calculate: Amount to be raised through equity.

Answer 21

c.1.

Summary Introduction

To calculate: Amount to be raised through equity.

Answer 22

2.

Summary Introduction

To calculate: Payout ratio and the effect on it under the residual dividend model.

Answer 23

2.

Summary Introduction

To calculate: Payout ratio and the effect on it under the residual dividend model.

Answer 24

3.

Summary Introduction

To explain: advantages and disadvantages of residual policy.

Answer 25

3.

Summary Introduction

To explain: advantages and disadvantages of residual policy.

Answer 26

d.

Summary Introduction

To determine: The series of steps that many company’s take in setting dividend policy in practice.

Answer 27

d.

Summary Introduction

To determine: The series of steps that many company’s take in setting dividend policy in practice.

Answer 28

e.

Summary Introduction

To explain: dividend reinvestment plan and its working.

Answer 29

e.

Summary Introduction

To explain: dividend reinvestment plan and its working.

Answer 30

f.

Summary Introduction

To explain: Stock dividends, stock splits and their advantages as well as disadvantages.

Answer 31

f.

Summary Introduction

To explain: Stock dividends, stock splits and their advantages as well as disadvantages.

Answer 32

g.

Summary Introduction

To explain: Stock repurchase and its advantages and disadvantages.

Answer 33

g.

Summary Introduction

To explain: Stock repurchase and its advantages and disadvantages.

Answer 34

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Ch. 14 - Prob. 1Q Ch. 14 - Prob. 2Q Ch. 14 - Would it ever be rational for a firm to borrow...Ch. 14 - Modigliani and Miller (MM), on the one hand, and...Ch. 14 - Prob. 5Q Ch. 14 - One position expressed in the financial literature...Ch. 14 - Prob. 7Q Ch. 14 - What is the difference between a stock dividend...Ch. 14 - Most firms like to have their stock selling at a...Ch. 14 - Prob. 10Q

Dividend policy. Introduction: Stock Dividend: When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

Solution Summary: The author explains the difference between a stock dividend or scrip dividend and the value of the firm under dividend irrelevance theory.

Concept explainers

To explain: Dividend policy.

Introduction:

Stock Dividend:

When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

To explain: Dividend irrelevance theory and assumptions underlying the theory.

To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends

To discuss: The information content or signaling, hypothesis.

To discuss: Clientele effect.

To explain: Catering theory.

To explain: The effect of catering theory on dividend policy.

To calculate: Amount to be raised through equity.

To calculate: Payout ratio and the effect on it under the residual dividend model.

To explain: advantages and disadvantages of residual policy.

To determine: The series of steps that many company’s take in setting dividend policy in practice.

To explain: dividend reinvestment plan and its working.

To explain: Stock dividends, stock splits and their advantages as well as disadvantages.

To explain: Stock repurchase and its advantages and disadvantages.

Chapter 14 Solutions

Dividend policy. Introduction: Stock Dividend: When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

Solution Summary: The author explains the difference between a stock dividend or scrip dividend and the value of the firm under dividend irrelevance theory.

Concept explainers

To explain: Dividend policy. Introduction: Stock Dividend: When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend

To explain: Dividend irrelevance theory and assumptions underlying the theory.

To explain: Reason for the investors choosing high dividend paying stocks and pay low or nonexistent dividends

To discuss: The information content or signaling, hypothesis.

To discuss: Clientele effect.

To explain: Catering theory.

To explain: The effect of catering theory on dividend policy.

To calculate: Amount to be raised through equity.

To calculate: Payout ratio and the effect on it under the residual dividend model.

To explain: advantages and disadvantages of residual policy.

To determine: The series of steps that many company’s take in setting dividend policy in practice.

To explain: dividend reinvestment plan and its working.

To explain: Stock dividends, stock splits and their advantages as well as disadvantages.

To explain: Stock repurchase and its advantages and disadvantages.

Chapter 14 Solutions

To explain: Dividend policy.

Introduction:

Stock Dividend:

When company decides to pay dividend in the form of shares instead of cash to its shareholders due to the shortage of liquid cash, itis said to be a stock dividend or scrip dividend